American Capital Mortgage Investment Corp. (MTGE) is a REIT that invests in both agency and non-agency debt. Its portfolio breakout is 60% agency RMBS, 30% loans, and 10% non-agency RMBS. It is one of the best dividend payers in the market with a dividend of 14.62%. It is a recent IPO (August 2011) that has little track record. It has been extremely successful so far, and it continues to look good. It sells at a PE of 5.22. Its FY2012 and FY2013 average analysts' EPS estimates have both risen significantly in the last three months (from $3.47 to $3.84 and from $3.59 to $3.90 respectively). This is impressive,. Analysts have been lowering their estimates on many other companies during that time. After all the EU is in a once in a lifetime financial crisis. The US, China, India, and Brazil are all slowing. In fact Christine Lagarde notified investors Friday, July 6, 2012 that the IMF was set to lower its global GDP estimate for 2012 in 10 days. Cuts to performance would seem normal. Yet MTGE is not showing that. Rather analysts project a steady five year EPS growth per annum of 5.00%. I wouldn't be surprised to see MTGE exceed that significantly given its performance so far. The portfolio grew to approximately $4B following the March equity offering.
To some it may seem counterintuitive to invest in the residential real estate market. It has been falling for years now. However, this may be one of the safest areas to invest in. In the US it has fallen roughly 35% from its highs. However, it has not popped back up as much of the rest of the market has from its 2009 lows. It has only recently seemed to stop falling. At worst it seems to be near the end of its drop. In another recession, it might fall a bit more; but it is not likely to see the bottom fall out a second time. It is already finding that bottom; and the current mortgage interest rates are so low that they make buying a home a cost saving measure compared to renting in many areas. The 30-year fixed mortgage today, Monday July 9, 2012, averaged only 3.50%. The 15-year fixed averaged only 2.91%. The replacement cost of many homes is buoying the price of the home, after an approximate 35% drop in home prices since 2006. On top of this the Fed is holding Fed Funds rates at near 0%, and it has said that it will keep them there at least into 2014. Further the Fed has extended Operation Twist until the end of 2012. This is designed specifically to keep mortgage interest rates low (long term bond rates low). The entire situation is sounding much more stable than just about any other industry. "Don't fight the Fed" is perhaps a doubly true saying when an industry is also in the bottoming process, and the Fed is specifically targeting the industry for health.
The Alt-A current to delinquent roll rates have decreased consistently in the last two years. The most underwater loans' roll rates have decreased by roughly 10% (from 25% to 15%). The not underwater roll loans' roll rates have decreased much more modestly from roughly 12% to 9%. These decreases are making the MBS gain in value. MTGE further helps this cause by concentrating its loan portfolios in geographical areas with prospective home price recovery. It does this for both agency and non-agency MBS, but it is most important in the non-agency case. The risk there is much higher. However, the possible reward is too. These MBS can be bought at steep discounts to face value.
MTGE still allocates its capital semi-conservatively with 14% in non-agency debt with 1.7 times leverage and 86% in agency debt with 8.4 times leverage. It tries to emphasize lower loan balance and HARP securities in its agency MBS portfolio. This decreases prepayment risk. This lets MTGE earn an approximately 21%-22% ROE before expenses, which is quite impressive.
MTGE increased its net book value by $0.91 during Q1 2012 to $21.78; and it increased its undistributed taxable income per share by $0.29 to $0.53. MTGE estimates it is providing an approximate 35% annualized economic return. With an agency portfolio CPR for Q1 2012 of 5.7% the risk seems low. The buying by institutional investors from the prior quarter to the latest quarter of 5,751,900 shares is quite a chunk of the shares outstanding of 23.61 million. It shows the institutions' interest and faith in MTGE. The only big negative I could find was the 14.70% short interest. I tend to think these are people with little faith in the US economy and the US real estate market. Part of the reason may be the relatively short track record MTGE has. I tend not to think this is a huge negative to MTGE, considering the high amount of institutional buying.
The one year chart of MTGE provides some technical direction for this trade.
The slow stochastic sub chart shows that MTGE is at overbought levels. The main chart shows that MTGE is in a strong uptrend. Its 50-day SMA is far above its 200-day SMA. Its price line is above its 50-day SMA. Its price is above its one year average analysts' target price of $22.25. These things make me think MTGE may be ready to cycle downward a bit. However, the investor should note that the price line has not been significantly below the 50-day SMA since Oct. of 2011. Therefore waiting for a fall could be a long wait. Averaging in may be a good strategy. On the other hand, the overall market has been looking weak lately. It could easily retrace substantially. Such a circumstance might provide an excellent buying opportunity.
If you like this REIT, you might also like a few other big dividend paying REITs such as American Capital Agency Corp. (AGNC) -- 14.46%, Two Harbors Investment Corp. (TWO) -- 14.71%, and New York Mortgage Trust Inc. (NYMT) -- 15.81%. Please do further research on these before buying them.
NOTE: Some of the fundamental financial data above came from Yahoo Finance.
Good Luck Trading.